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Money for nothing? Sixth Circuit holds that employees paid over $100k per year may be entitled to overtime if not guaranteed a minimum weekly salary

A recent Sixth Circuit Court of Appeals’ decision highlights the importance of documenting pay arrangements with employees to ensure compliance with the Fair Labor Standards Act (“FLSA”). In the case, the exempt status of the employees depended on whether they were paid by the employer on a “salary basis.” The employees’ offer letters stated that they would be paid on a day rate basis, without any reference to a guaranteed amount they would be paid on a weekly or less frequent basis. However, in practice, the employer paid the employees an amount equal to six days of work each week (including weeks when they did not perform work for six days because of holidays and sick leave). The employer’s pay practice resulted in the employees earning over $100,000 annually.

When the employees sued to recover more money in the form of overtime, the Sixth Circuit reviewed the technical language of the FLSA regulations and determined that, in order to show that the employees were paid on a “salary basis,” the employer had to establish that it guaranteed the employees a minimum salary amount. The employer could not conclusively establish that such a guarantee was made as the language of its offer letters conflicted with the evidence of its actual pay practices. Accordingly, the employees’ claims for overtime were allowed to go forward.

Certain exemptions under the FLSA provide that employers do not have to pay employees overtime if, in addition to performing certain duties, the employees are paid a certain amount on a salary basis. To determine if an employee is paid on a salary basis, courts use the “salary-basis test.” This test requires that (1) the employee regularly receive a predetermined amount each pay period on a weekly, or less frequent basis; and (2) the predetermined amount is not subject to reduction because of variations in the quality or quantity of the work performed.

The United States Court of Appeals for the Sixth Circuit recently considered whether the “salary-basis test” requires that the employees’ weekly salary be guaranteed. The plaintiffs in Hughes received an offer letter stating that they were entitled to a day rate of $337 per day for each day actually worked. Thus, they claimed that their pay arrangement did not meet the “salary basis test” because (1) their pay was calculated more frequently than weekly; and (2) they were not guaranteed any minimum weekly amount.

The employer responded with evidence that the plaintiffs were orally told that they would work ten hours a day for six days a week. Additionally, the employer showed that, in practice, in every week the plaintiffs worked they received pay consistent with at least a weekly salary equivalent to six days of work at ten hours per day, which resulted in the plaintiffs being paid over $100,000 annually. In fact, the employer showed that it even paid the plaintiffs the minimum weekly amount equivalent to six days of work on weeks when they did not perform work on six days for reasons such as sickness and holidays. Based on this evidence, the employer argued that its pay arrangement satisfied the “salary-basis test” based on its actual payment practices, regardless of whether it guaranteed a minimum salary amount.

The Court rejected the employer’s argument and found in favor of the employees. First, it determined that the employer could only meet the “salary-basis test” with regard to the plaintiffs if it guaranteed them a weekly salary amount. The Court determined a guarantee was necessary based on the language of the “salary-basis test,” which provides that what “the employee regularly receives each pay period” must not be “subject to reduction because of variations in the quality or quantity of the work performed.” Moreover, a separate regulation allowing employers to retain an employee’s exempt status while paying them a day rate explicitly requires that “the employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days, or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned.”

Second, the Court found that the employer’s evidence of an oral promise of a particular number of days of work each week and its practice of consistently paying a minimum weekly amount did not conclusively establish that the plaintiffs were guaranteed a weekly salary. This was particularly true in light of the plaintiffs’ offer letters, which referenced a day rate and provided no guarantee of any particular number of days of work or salary amount each week. Accordingly, the Court determined that the plaintiffs’ claims for overtime could go forward.